It’s widely understood that pensions are designed to help fund your retirement; however, far fewer realise the valuable role they can play in wider financial planning – especially for parents balancing the high cost of childcare this summer holiday season. However, half of people (52%) don’t know that paying into a pension can reduce their taxable income, according to research from Standard Life, the retirement specialist focused entirely on retirement savings and income.
Many parents face significant childcare costs over this summer holiday season – with the average price of a childcare holiday club costing an average of £179 a week. For parents already juggling higher food, activity and holiday costs, childcare can become one of the biggest household expenses of the summer. The Government’s free hours of childcare will provide some welcome relief to many families; however, any household with a parent whose net income exceeds the eligibility threshold will lose access to this support, making childcare costs even higher.
The £100k childcare cliff edge and the power of tax relief
If any parent’s adjusted net income exceeds £100,000 – even by £1 – the childcare trap is triggered, which means the family loses their eligibility for the Government's 15 or 30 hours of funded childcare – leaving them facing significant childcare costs.
However, what many may not realise is that making additional pension contributions, such as through salary sacrifice where it's available, can reduce adjusted net income which may help some parents – especially those sitting just above the £100,000 limit - remain below this threshold while continuing to build their retirement savings.
Mike Ambery, Retirement Savings Director at Standard Life, commented: "For many parents, the summer holidays are one of the most expensive times of the year, with childcare costs placing additional pressure on household budgets. At the same time, frozen tax thresholds mean that a pay rise doesn't always leave families better off, and if the net income of either parent exceeds the £100,000 mark, crossing that threshold can mean the whole family losing eligibility for the valuable childcare support.
"Understanding how pensions interact with the tax system can make a meaningful difference to family finances; however, what's striking is that more than half of people aren’t aware of the power of pension contributions when it comes to reducing their taxable income. Depending on individual circumstances, increasing pension contributions could not only boost retirement savings but also help some parents manage key income thresholds and retain valuable childcare support – especially those on the borderline.
"Family finances are often a balancing act between today's priorities and tomorrow's goals. Taking a little time to understand how your pension fits into your wider finances can help you make more informed decisions, giving you greater confidence now and helping to build stronger financial security in the future."
Mike Ambery shares his top tips to help parents make the most of their pensions:
Check each parent’s adjusted net income separately, not just salary
“Parents close to the £100,000 threshold should look beyond their headline salary and understand their adjusted net income. This is the figure that determines eligibility for some childcare support, and it can be affected by pension contributions, bonuses and other income. It's worth remembering that pension contribution levels can often be reviewed and adjusted over time, which may help some people balance both their retirement savings goals and tax considerations. The £100,000 limit applies to each parent individually, rather than to household income overall, meaning a household could lose support if one parent goes over the threshold, even if the other earns less.”
Check whether salary sacrifice is available in your workplace
"If your employer currently offers salary sacrifice, it's worth understanding how it works. Depending on your circumstances, additional contributions into your pension through salary sacrifice may help reduce your adjusted net income while increasing your pension contributions in a tax-efficient way."
Don’t forget about Tax-Free Childcare
“Alongside funded hours, parents should check whether they are eligible for the Government’s Tax-Free Childcare, as this can also be affected by income. For families paying for nursery, holiday clubs or wraparound care, this support can make a real difference if you are eligible.”
Use childcare reconfirmation as a financial check-in
“Parents using childcare support typically need to reconfirm their details and financial circumstances every three months3. While this is about reconfirming your eligibility for childcare support, this can also serve as a timely reminder to have a check-in on your finances more generally – whether that’s your day-to-day outgoing, savings, or pension contributions.”
Seek support or guidance before making significant changes
"Everyone's circumstances are different, particularly when balancing work and family life. If you're unsure how pension contributions fit into your wider finances, and any income threshold considerations, seeking guidance or regulated financial advice before making any significant changes can help you understand your options and feel better informed. Many employers' HR teams may also be able to provide information about workplace pension arrangements and benefits, helping you better understand the options available through your employer."
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